Few agents realize this, but the Days on Market (DOM) figure reported by your MLS is almost certainly wrong, often times by as much as double. Somewhere in the back of your mind, you probably always suspected there was something wrong with their DOM — it always seems to report number that is a lot lower than reality — but today I’ll show you how to prove it with hard numbers.
Now because their mathematical error results in a very rosy picture of your current market conditions, your MLS is probably in no hurry to correct the error.
So I’m going to introduce you to a brand new method for calculating the average DOM in your market.
o you want to impress your clients and stand out in a sea of average agents. Who doesn’t?
What if I told you that you could learn a simple calculation that would set you apart from 95% of the other agents? Sound too good to be true? It’s not.
Here’s a little tool I train agents with. But it’s not just for listing agents. Knowing your market cold is the first step to becoming an authority — the guy everyone goes to when they have a complex question about real estate — and without this tool you probably don’t know your market as well as you think you do.
You can get all the calculators for free at http://www.recalculators.com.
Allow me to introduce you to Absorption Rate. Before your mind wanders off into numbness, let me also tell you that this is one of the most practical metrics or measurements you can learn for your market or for subsets of your market.
And better yet, it will only take you a few minutes to learn it. Although the manufacturing segment of the economy has been using this metric for decades, real estate, for the most part still doesn’t.
OK, so what is Absorption Rate? Simply put, it is the rate at which a market absorbs or eliminates inventory. Markets are always changing: new inventory is being added and old inventory is being sold or absorbed.
Absorption rate helps you to take that fluid, ever-changing market and bring it into a measurable snapshot that you can use to advise your clients.
When I was still in college I took a class on managerial calculus (I know… YICK!) and one of the only things I remember from the class was a small section on inventory modeling.
It seems that one of the practical uses for higher mathematics was to allow industry to determine the precise level of inventory to stock. Stock too much, and the company tied up cash or debt in sitting inventory and carrying costs. Too little, and the company would lose sales by not having the products on hand.
Now let’s take the logical step and apply it to real estate. Have you ever wondered why the average Days on Market (DOM) number from your local MLS never feels right? Why the MLS always seems to paint a rosier picture than reality? That’s because it’s not right! Sometimes it’s off by a little; other times it’s off by a mile. But it’s never accurate.
Before writing this article, I thought I would pull the latest DOM figures from my local MLS and compare that statistic with the actual calculated DOM.
The latest number as reported in my MLS is 77 days. However, when I calculated DOM using the absorption method, the actual average DOM is 240! And believe me, your MLS is off as well — maybe not by as much as mine, but it is typically off by more than 50%.
So why the huge disparity? Because the MLS calculates the average DOM as the average days on market for the listings that actually sold.
What it leaves out of its calculation altogether are homes that were withdrawn, listings that expired, listings that were withdrawn for a day and then re-listed to restart the clock, or those that were never put in the MLS until they sold (like new construction where they might list only one home in a subdivision, but actually have 20 for sale). And all of those affect the reported DOM.
Not so when using the Absorption Rate method. You’ll know exactly how many days it takes inventory, on average, to turn over.
Or let’s suppose you had a builder as a listing client. Using absorption rates for various price points, you could wisely advise him on which price points to focus on in order to maximize his sales.
Or suppose you were going on a listing appointment and you were able to advise your client of the number of month’s inventory of homes like his that are currently on the market. Would that information be valuable in winning the listing? Of course it would be!
What if you were working with a buyer, negotiating for his dream house. Imagine if you were able to communicate to the seller’s agent that there was over a year’s worth of inventory currently on hand for that particular price or type of home? You could easily give the listing agent the information he needed (and probably didn’t know) to help him persuade his client to consider your buyer’s offer.
Well, believe it or not, it’s easier than you might think to have those numbers. All you need to know is how many of a certain price or type of property sold in the last twelve months, and how many of that same price or type of property is currently on the market.
For example, let’s say that in the last 12 months there were 8,000 homes of a certain price or type sold. Currently, there are 2,000 on the market. That means that the current inventory level turned over, or sold, four times in a year. (8,000 / 2,000 = 4.0)
Now, divide 12 (the number of months in a year) by 4.0 (the inventory turnover rate) and you have 3.0 (the absorption rate) to put it into months. The absorption rate is 3.0 months. That means there is currently a 3.0 month inventory of properties of that certain price or type on the market.
See how easy that was? But I’ll make it even easier. Our company created the following Absorption Rate Calculator for you to use and it does all the math for you. Just plug in the two numbers, press the button, and voila… the absorption rate! Now how cool is that?! Let me know what you think.
If you want to try out my calculator, it’s completely free. Just click the image above or go to: http://www.recalculators.com
As always, thanks for reading.
PS. I would like to thank Matt for this wonderful article and his continued interest in helping this fellow realtors